4 Burning Questions About a Criminal Case Against Goldman

By Daniel Indiviglio

The Department of Justice is reportedly considering whether to bring criminal charges against investment bank Goldman Sachs, based on the Securities and Exchange Commission complaint. Speculation is swirling that Wall Street haters could finally get their wish and see some bankers behind bars. Here are the answers to some key question about a potential criminal investigation:

Could a Criminal Case Succeed?

The fraud statute that the SEC is using for its civil suit could also be used to prosecute Goldman criminally. So in theory, it is possible that criminal charges could stick -- if the SEC's civil case succeeds. Yet, the standard for a criminal case is much higher. The DOJ must present very compelling evidence that a jury would be able to understand well enough to find that, beyond doubt, Goldman and/or some of its bankers are guilty of fraud. Given that there are many people questioning whether even the civil case can succeed under a weaker standard of guilt, it's relatively doubtful that the criminal charges would stick. Yet, the public doesn't have all of the information, so it's too soon to know the fate of a criminal case for sure.

Who Could Be Prosecuted?

The civil case was brought against the firm and a single named banker -- Fabrice Tourre. Who might the DOJ choose to prosecute? According to Chicago Law School Professor and securities law expert M. Todd Henderson, the sky is the limit. If the DOJ feels particularly ambitious, they could try to allege a conspiracy and prosecute the heads of the mortgage unit, he says. But he also finds it unfathomable that the DOJ could show that such a conspiracy existed. He further thinks it's extremely unlikely that the government could indict the firm itself, as this would essentially condemn Goldman as a criminal organization. As a result, it's more likely prosecutors focus on a few bankers, like Tourre, if they have enough evidence to bring a case.

Where does Settlement Fit In?

Yesterday, reports indicated that Goldman might be considering settling the civil case. If they do, how would that affect a potential criminal case? Henderson thinks that it would likely preempt one. "It's hard to imagine that they wouldn't strike some deal that would get rid of all these actions simultaneously," he says. In fact, he notes that there have been many cases where the U.S. attorney's office was used to add additional leverage to civil cases. So the threat of a criminal investigation could merely serve to pressure Goldman to settle. He speculates that what looks like an escalation could just be an attempt by SEC officials to ensure a quick settlement to get the case behind them.

Consequences for Wall Street on a Whole?

In the eyes of Wall Street haters, the SEC-Goldman case probably looks a little analogous to indicting Al Capone for tax evasion. Government officials are largely displeased with the actions of Goldman and Wall Street, but have trouble identifying any tangible wrongdoing. Many accusations of Goldman breaching its fiduciary duty were thrown around at this week's marathon Senate committee hearing. So if officials figure out some way to go after the banks connected to the government's belief that Goldman breached its fiduciary duty to clients, then there could be broader consequences for Wall Street. Otherwise, the government will have to rely on fraud. In the context of sophisticated investing, such one-off cases won't be easy to win.